Chipmaker Broadcom to buy software group VMware for $69bn
ft.com/content/205bbaf6-b661-40fa-91e7-7d8881...
ft.comPosted May 26, 2022, 5:24 PM UTC
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ft.comVMW is worth 52billion dollars but they are buying for 69bill. What am I missing? Why is the market not pricing that in?
Edit: the title is wrong, it's 61 billion. They also have about 10 billion dollars in debt and also the deal may not go through.
Edit
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Because they are probably overpaying quite a lot for vmw. That’s how all acquisitions happen. And that’s why many of them go to shit. It simply doesn’t make sense (generally) to pay a big premium for a company.
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I work on the accounting side of acquisitions and can confirm. We determine the fair value which is almost always off from what was actually paid. This is considered “Goodwill” and is sometimes a staggering amount. It’s basically an overpayment but it’s not quite that simple.
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Also has to do with merge arbitrage traders and the likely hood they think an acquisition is likely to happen. They likely think the deal may not go through and the price wont be close to the deal, or if they think it will be bought by someone else, the outstanding shares price might increase above the acquisition price.
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Title isn’t wrong they’re just factoring the debt assumption into the deal size. Shareholders don’t get the $8b but Broadcom still has to assume that debt along with the $32 billion it’s borrowing to finance the deal
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It mostly the control premium, but also it recognizes that if you try to buy it you will have to climb the supply slope and pay a lot more than the current equilibrium price.
The control premium is the idea that 1 share of a company has absolutely no hope of making management decisions but all the shares do. So each share, individually, is worth less than the whole. With just the 1 share you have an interest in assets and income. With all the shares, you get that same interest plus you can have the company do whatever you want. The control premium.
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I'm not sure what to make of this. the EMC VMWare merger felt weird, this feels weirder still. Like I don't think I've seen any broadcom chips that use any sort of virtualization technologies (I don't think containers count). Do they want to provide arm servers for enterprise class customers?
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I suspect Broadcom is just looking to diversify and not doing this with any real tech goals in mind. I mean maybe we’ll see Broadcom chips support virtualization the future or something, but I doubt it s a serious driver for this decision.
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Well EMC is now owned by Dell, who recently spun off their VMWare stake, and Broadcom had been trying to diversify away from semiconductors:
https://www.ft.com/content/615ceeb9-d474-45be-84f8-b44aea7a5356
Buying VMware would complete the transformation of Broadcom. Tan has turned this semiconductor roll-up into a stable of mature software stars with mediocre growth but impressive cash generation.
The Trump administration quashed Broadcom’s attempt to buy chip rival group Qualcomm in 2018. Tan pivoted to acquire CA Technologies and the enterprise security unit of Symantec, spending $30bn. His hunch was that corporate relationships with legacy software groups would persist for years, even as operations migrated to the cloud.
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Broadcom network gear beats the shiznit out of Cisco in today’s world
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Broadcom makes first party network gear? TIL! I thought they just make the chips for other vendors' network gear.
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https://www.broadcom.com/products/ethernet-connectivity
Broadcom is focused primarily on cards. Paired with Brocade switches, it works pretty dang well.
Yes, their primary focus is still chips though. Their Npar works better than anyone elses I have tried though.
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Chipmaker Broadcom to buy software group VMware for $69bn
Takeover would help transform acquisitive semiconductor company into diversified tech business
US chipmaker Broadcom has agreed to acquire cloud software company VMware for $69bn, including debt, in a takeover that signals the market for large corporate mergers might be thawing after a stock market rout at the start of the year.
VMware shareholders will be able to choose to receive either $142.50 in cash or 0.2520 shares of Broadcom stock for each of their shares in the software group, at a 33 per cent premium over the value of the company before talks emerged last week.
The takeover, which is being supported with $32bn in bank financing, would help transform Broadcom, an acquisitive semiconductor group, into a diversified tech company ranging from chips to cloud computing services.
Hock Tan, the Malaysian American billionaire who leads Broadcom, has been on the hunt for a software deal for years after his attempt to acquire chipmaker Qualcomm was blocked in 2018 by then US president Donald Trump over national security concerns.
“Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers,” Tan said.
In striking a deal for VMware, Tan, known as the chip industry’s arch consolidator, is opportunistically picking up one of the software industry’s most valuable and profitable companies.
VMware’s stock price had fallen about half from its 2019 peak — and 20 per cent below where it traded at the beginning of the year — before deal talks emerged. But VMware’s high profit margins and stable recurring revenues offer the ability for Broadcom to finance a large takeover and then quickly pay down debt.
“They are very disciplined,” said Tony Wang — who covers Broadcom for T Rowe Price, one of its largest outside shareholders — adding that the deal did not “surprise” him given that tech stocks were more attractively valued after this year’s market sell-off. When technology valuations were high in recent years, Broadcom resisted the urge to make large purchases, said Wang.
VMware is the biggest test yet of Tan’s strategy to grow Broadcom through acquisitions. Many see his approach as akin to a private equity firm, where the buyer will sell off non-core assets and cut costs to increase overall profits.
“Hock Tan is running Broadcom kind of like a private equity shop,” said Jordan Chalfin, a senior analyst at CreditSights. “He has a reputation for slashing costs. That is probably going to be part of the playbook too.”
If completed, the deal will further turn Broadcom into a diversified technology company instead of one focused principally on semiconductors. Inclusive of VMware, Broadcom’s revenues would be split evenly between software and semiconductors.
Broadcom acquired enterprise software company CA Technologies for $18.9bn in 2018 and then purchased cyber security group Symantec a year later for $10.7bn, propelling it into the software sector.
In VMware, Tan is targeting a company that is considered one of the cloud computing industry’s most important groups. Its services are used by large corporations to manage private and public cloud networks as well as data centres.
Broadcom’s acquisition would also provide a big financial payout for personal computer billionaire Michael Dell, who acquired VMware in 2016 alongside private equity firm Silver Lake in a $67bn takeover of technology conglomerate EMC.
Dell kept VMware independently managed from his personal computer and tech infrastructure company Dell Technologies, and the company spun-off its 81 per cent stake in VMware in November last year.
Dell, who is chair of VMware, owns about 40 per cent of its outstanding shares, a stake worth about $24.5bn under the terms of the takeover agreement. He will roll half that stake into the new combined company, signalling confidence in Tan’s strategy for VMware.
“The way Michael Dell and Silver Lake are good at financial engineering, Broadcom is as well,” said Chalfin. “VMware is an ideal currency.”
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$69bn, including debt
Nice.
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More coverage at:
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Broadcom buys cloud company VMware for $61B in 2nd-largest tech deal of 2022 (upi.com)
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Chip Maker Broadcom to Acquire VMWare for $61 Billion (pcmag.com)
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Funny timing that my very large corporation uses VMWARE and it’s been down all day. First time this has happened.
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Silver Lake owns virtually most big technology driven acquisitions.
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Nice
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Nice
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CA customers have been on a rough ride since the company was acquired by Broadcom in 2018 for $18B. Until then, they were accustomed to 10% renewal price increases, but now, they’re getting bludgeoned with increases ranging from 100% to 450%.
https://www.clearedgepartners.com/post/broadcom-price-increases
I wonder what will happen to Wmware licenses
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Reduction because Dell has been beating us with a broom blowing prices out of the stratosphere for years
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[removed]
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Nice
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Nice
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Hock tan is living in the dark ages. If he thinks a bunch of VMware employees are going to work in the office he’s going to find out soon that isn’t the case. Recruiters from other companies are going to have a field day snatching up the best talent
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all these huge mergers are gonna spawn big issues
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I’ve never even heard of Broadcom, I’m presuming they make/own Qualcomm, who I have heard of?
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Broadcom did try to buy Qualcomm some years ago, but it failed. IIRC They compete somewhat, they both make/made chips for WiFi and routers.
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....nice....
Niiiiccce
Nice.